Bad Employment Arbitration Clauses

Now that we have (finally!) gotten to the section of the textbook where the courts aren’t upholding every single arbitration agreement for the purposes of furthering the judiciary’s pro-arbitration policy, I was curious to see what other employment arbitration agreements have been overturned by the courts based on the principles advanced in Hooters of America v. Phillips. In that case, the arbitration “agreement” promulgated by the company was found to violate Hooters’ duty towards its employees because of its completely unfair conditions that basically guaranteed that the company would win (or if it didn’t win, could easily get out of arbitration and go to the court, while the employee could not). Here are two of the other judicially-overturned arbitration clauses that I found:

• ·       In Penn v. Ryan’s Family Steakhouses, Inc. (95 F.Supp.2d 940), the arbitration clause provided three categories of individuals and stated that the panel would be comprised of one person from each of the categories, all of which were administered by Employment Dispute Services, Inc. The categories were:

(a) Supervisors or managers of an employer signatory to [EDS] Agreements;

(b) Non-exempt employees (non-exempt as defined by the Federal Wage and Hour law) who are signatory to [EDS] Agreements;

(c) Attorneys, retired judges, or other competent professional persons not associated with either party.

Because the employer was a “repeat player” in using EDS’ services, the court found that EDS had an incentive to load the lists with people who would side with Ryan’s. Such an incentive made this section of the agreement just as unfair as the one in Hooter’s.

• ·      In Murray v. United Food and Commercial Worker’s International Union (289 F.3d 297), once again, the Fourth Circuit Court of Appeals found that the method for choosing arbitrators as per the agreement signed by the plaintiff was unconscionable and made the clause unenforceable. Here, the clause stated:

“A single arbitrator shall be chosen by the alternate strike method from a list of arbitrators provided by the [Local 400] President's office. Such arbitrator shall not have the authority to alter[,] change or diminish any power, right or authority granted to the President or Acting President of Local 400 under the terms and conditions of the Bylaws of Local 400.”

Though there’s nothing wrong with the “alternate strike method” of selecting arbitrators, the court here took issue with the fact that the initial list of arbitrators was totally generated by the Union, making it impossible for Murray to have a fair outcome through the arbitration process

Out of brevity, I won’t post more cases, but it seems as though many employment contracts feature this one-sided arbitrator selection process, which the courts refuse to uphold in most cases. Reading all of these decisions closely, it’s interesting to see how the courts carefully skirt around the boundaries of precedent established by some of the earlier cases we’ve looked at. In the end, I find it kind of heartening to know that courts will still protect the “little guy” against really biased arbitration clauses.

Unequal Bargaining Power

In Gilmer v. Interstate/Johnson Lane Corp., the Supreme Court discussed unequal bargaining power between employers and employees, and how the existence of such unequal bargaining was not a sufficient reason to hold arbitration agreements unenforceable in an employment context. The Court cited two prior decisions, Rodriguez de Quijas and McMahon to back up their reasoning. While I agree with the Court’s decision overall, because it would have been entirely impractical to hold that employment disputes can never be arbitrated, I was intrigued as to what unequal bargaining arrangements were validated by the Court in the prior two decisions.  This is especially because, like several of my classmates, I have serious issues with people being forced into arbitration because they had to sign contracts of adhesion. As Justice Stevens pointed out in his dissent, you don’t really have a choice to reject the arbitration clause in your employment agreement unless you’d also like to reject the job you’re being offered. I got the impression from the reading that the Court is really looking to Congress to fix the unequal bargaining issue (and protect consumers and employees), and that’s the reason why they continue to make decisions in favor of employers.

Rodriguez de Quijas v. Shearson/American Express, Inc. (490 U.S. 477) was a case involving a customer agreement signed by the plaintiff (and others), who were securities investors. The plaintiffs alleged that the brokerage firm respondents had lost their money and had conducted fraudulent transactions in violation of the Securities Act of 1933. The lower courts had held that some language in the Securities Act precluded those claims from being sent to arbitration. Much like the decision in Gilmer, the Supreme Court held that the Securities Act did not, in fact, stop claims from being sent to arbitration. Interestingly, Justice Stevens also dissented on this case.

Shearson/American Express, Inc. v. McMahon (482 US 220) is, unsurprisingly, more of the same issue as the Rodriguez case. Here, the claims were under the Securities Exchange Act of 1934 and the RICO Act. And, once again, the Supreme Court found that claims under both acts were, in fact, arbitrable.

I was surprised to find that these cases were less about unequal bargaining power and more about statutory interpretation, considering the context in which they were discussed in Gilmer. It’s true that, as in Gilmer, the claimants in these cases argued that statutory language is what stopped a certain kind of case from going to arbitration, but the unequal bargaining power wasn’t really an issue that was heavily discussed in either. Maybe the Supreme Court didn’t have a wide body of arbitration cases to pick from?  Either way, their point is clear: claims under any statute can be sent to arbitration, because of the judicial system’s pro-arbitration stance. I don’t know how fair that is to consumers, but again, maybe the Court is looking to Congress to fix that issue. 

It's hard to be evidently partial

After doing the reading, especially the section on Commonwealth Coatings Corp. v. Casualty Co. and Positive Software Solutions v. New Century Mortgage Corp., I wondered what it would take for the 5^th Circuit to find “evident partiality” in an arbitrator’s relationship with a party. I don’t necessarily agree with the logic behind Justice Black’s opinion in Commonwealth, because I think that proof of actual bias or partiality, or proof that the connection between the arbitrator and the party affected the deliberations is a vital part of any claim that the decision should be vacated. I guess that means that I agree more with Justice White’s “narrowing” opinion. I also agree with the decision in Positive Solutions that a minimal working relationship more than 10 years before the arbitration is too tenuous to warrant vacating the award.

            So, given that, I decided to try and find other “partiality” cases to see what the 5^th Circuit did and didn’t consider grounds for vacating an award. Here’s a short list of some cases I found:

• ·      Ameser v. Nordstrom, Inc. (442 Fed.Appx 967): An arbitrator failing to disclose that they had previously participated in an arbitration involving Nordstrom is not sufficient evidence of “evident partiality” to warrant vacating the decision
• ·      United Forming, Inc. v. FaulknerUSA, LP (350 Fed.Appx 967): Arbitrators allegedly suggesting defenses and causes of action to United Forming during the hearing does not show actual bias or evident partiality.
• ·      Weber v. Merrill Lynch Pierce Fenner & Smith, Inc. (455 F.Supp.2d 545): Plaintiffs did not meet “onerous burden” to show evident partiality. They alleged that the arbitration award should be vacated because the arbitrator and his wife belonged to several of the same society organizations as the Merrill Lynch employees named in the complaint.
• ·      Bulko v. Morgan Stanley DW, Inc. (450 F.3d 622): The 5^th Circuit overturned a District Court’s decision vacating an arbitration award. The District Court had determined that one of the arbitrators actually wasn’t qualified according to the standards set out by parties in their arbitration agreement. The Court decided that any error made in selecting said arbitrator was “trivial”, and that the award shouldn’t have been vacated.

Basically, it seems that the 5^th Circuit does not often vacate arbitration awards on the basis of evident partiality. That seems to fit in with our justice system’s pro-arbitration stance, but again begs the question: are we giving arbitrators too much leeway and too little oversight?